A Rule That Reinforces the Entire Fee-Only Framework
Scattered across our earlier articles on client-level segregation and the fee-only structure SEBI's IA framework is built around, one specific, recurring obligation ties it all together operationally: wherever a direct plan version of a product is available, an IA must recommend it over the commission-bearing regular plan.
What "Direct Plan" Actually Means
Most mutual fund schemes (and certain other products) are available in two variants — a regular plan, which pays ongoing trail commission to a distributor, and a direct plan, which carries no distributor commission and, correspondingly, a lower expense ratio for the investor. The economic difference compounds meaningfully over a long holding period, even though the difference in any single year can look small.
Why This Obligation Exists
If an IA — compensated purely through client-paid advisory fees, not product commission — were to recommend a regular plan where a direct plan of the identical underlying scheme is available, there's no economic justification for that choice from the client's perspective. The IA gains nothing from the regular plan's commission (since IA compensation is fee-only, not commission-linked), so recommending it anyway would simply cost the client more for no corresponding benefit — precisely the kind of misaligned recommendation the entire IA framework is designed to eliminate.
This Isn't Just Good Practice — It's a Specific Compliance Expectation
While this obligation flows from the broader fee-only, fiduciary structure of IA regulation rather than existing as an isolated standalone rule, it's treated as a specific, checkable practice during compliance review — recommendations that steer clients toward regular plans without clear justification are a red flag precisely because they're economically inconsistent with a genuinely fee-only advisory relationship.
Documenting Compliance With This Obligation
For every product recommendation involving a scheme available in both plan variants, your advisory records should clearly reflect that the direct plan was recommended — and where, in a genuinely unusual circumstance, a regular plan was somehow involved (for instance, a client already holding regular-plan units from before the advisory relationship began), the reasoning for that specific situation should be documented rather than left ambiguous.
What This Means for Reviewing a Client's Existing Portfolio
Where a new client comes to you already holding regular-plan investments from a prior distributor relationship, your advisory role includes flagging this cost inefficiency and recommending a switch to the direct-plan equivalent, subject of course to considering any switch-related tax or exit-load implications specific to that client's holdings — the direct-plan obligation applies to your ongoing advisory guidance, not merely to fresh product recommendations.
Why This Matters for Your Own Practice's Audit Trail
At annual compliance audit stage, reviewers will typically sample advisory recommendations and check for consistent direct-plan steering — a pattern of regular-plan recommendations without documented justification is one of the clearer, more objectively testable compliance findings an auditor can identify, precisely because there's little room for judgment-based justification once the fee-only economics are laid out.
Building Direct-Plan Compliance Into Your Advisory Process
We help IAs build recommendation documentation practices that clearly evidence direct-plan compliance, and review existing client portfolios for legacy regular-plan holdings that should be flagged as part of ongoing advisory service.
Want your advisory records reviewed to confirm direct-plan compliance is properly evidenced across your client base? Talk to Anuj Desai & Associates.
This article is for general informational purposes and does not constitute investment or regulatory advice specific to any adviser's recommendations.